Brussels, 19/10/2012 (Agence Europe) - In the early hours of Friday 19 October, the European Summit said that speedy progress was needed in setting up a common eurozone bank supervisory mechanism under the aegis of the European Central Bank (ECB) (see EUROPE 10712), the objective being to introduce the legislation by the end of the year and bring it on-stream in 2013 in full respect of the integrity of the single market. It seems highly unlikely that the direct bailout of struggling banks, which will be possible once the new bank supervisory mechanism is up and running, will be of any immediate benefit to Spanish banks.
The president of the European Commission, José Manuel Barroso, said that what was new was the date of 1 January 2013 for adopting the legislation for a common bank supervisory system for the eurozone, and the timetable for bringing this into practice. He mentioned comments by the head of the ECB, Mario Draghi, that it would take less than a year but certainly more than one or two months, to bring this on stream. We will work as fast as possible, promised the head of the European Council, Herman Van Rompuy.
The vagaries around the date when the bank supervisory system will be up and running are in Germany's interests because it is in no haste to bail out other country's banks with its own cash, particularly in the run-up to an election. The German chancellor, Angela Merkel, said she had always said that quality should come before speed and the idea was to set up a bank supervisory authority worthy of the name. Political will exists, she said, to get agreement in principle in December, but the single supervisory system would not be introduced in 2013, or at least not at the start of the year. Asked by a reporter whether Germany's lack of haste was due to the elections in Germany in September 2013, she said that this was not correct.
Describing the draft legislation, Internal Market Commissioner Michel Barnier has already spoken about gradually increasing the bank supervisory system's powers in the eurozone: supervising banks at the start of 2013 which have received public aid; too-big-to-fails at the end of June 2013; and the other 6,000 or so eurozone banks at the end of 2013 (see EUROPE 10686 and 10687).
System will cover all banks. It is important to note that Germany has now agreed that the new bank supervisory system will cover all banks, even regional banks. Van Rompuy commented in this connection that the ECB should supervise different banks in different ways, making as much use as possible of national bank supervisory schemes. The French president, Francois Hollande, said all banks would be covered without distinction, but national supervisory systems may work on behalf of the central supervisory system for regional banks.
Europe's leaders said it was crucial to break the vicious circle connecting bank woes with excess sovereign debt. When the common bank supervisory system is up and running, the European Stability Mechanism (ESM), the eurozone's permanent bailout fund with lending capacity of €500 billion, will be allowed to provide direct aid to struggling eurozone banks. It will be for Eurogroup to decide on the actual operational details in conformity with the decisions by eurozone leaders in June 2012 (see EUROPE 10645). At a conference in the Hague on Friday on the single market, Barnier said he understood that some countries have misgivings about the prospect of the idea, but there would be nothing automatic about the bailouts. The Greek prime minister, Antonis Samaras, said he was in favour of direct bank bailouts if it could help Greek banks.
No direct bailout of Spanish banks? After the eurozone summit in June, Spain has believed that its banks, which need some €40 billion in new money, would be able to get direct aid from the European Stability Mechanism without this having a negative impact on the country's public debt, but Germany, Finland and the Netherlands have made it clear that any direct bank bailout by the ESM will not cover toxic assets from the past (“legacy assets”), in other words, debt created before the creation of the single bank supervisory system.
The longer it takes to get the bank supervisory mechanism up and running, the less likely it is that the ESM will provide any cash directly to Spanish banks. The recapitalisation of Spanish banks, for which the eurozone has earmarked €100 billion under the ESM, is expected to start in November. Merkel said there would be no retroactive direct recapitalisation, and Hollande said that a different procedure had been found for Spain, with funds being provided for the banks, but channelled through the Spanish government. Italian prime minister Mario Monti said he didn't think it had been said that direct bank recapitalisation could not take place if the bank supervisory system was not fully set up.
In June of this year, direct recapitalisation of banks was “just a possibility” but “now it is becoming more concrete” said Spanish prime minister Mariano Rajoy. He said he is not calling for bank recapitalisation because it's urgent, but because Spain believes in banking union and fair play for all.
The Spanish press has already given up on the idea of direct bailout of Spanish banks, talking now about 2014 for intervention from the ESM. Sources close to Spanish newspaper El Pais say it was only 4% of GDP that was at play, so the Spanish public debt remains below the European average.
Respecting the rights of non-euro countries. Europe's leaders say it is important for the common eurozone bank supervisory system to protect the integrity of the single market and guarantee the rights of countries not yet in the euro, but planning to join at some point. Scandinavian and central European countries refuse to join a bank supervisory system piloted by the ECB that they would have no means of influencing. Equal treatment demands satisfactory decision-making procedures for countries in the ECB's bank supervisory committee (yet to be set up) and the European Banking Authority alike.
Czech prime minister Petr Necas said ahead of the summit that 95% of the Czech banking industry was controlled by banks outside the country, which means extreme caution is required on bank rules. If the banking union were sent for approval in its current format, the Czech Republic would certainly have to veto it, he said. Swedish prime minister Fredrik Reinfeldt commented: “It's better to get things right than to rush things. Who is recapitalizing the bank; who is paying? If you don't have the answers to that then you don't have a proposal that is finished.” The British prime minister, David Cameron, encouraged the eurozone to make progress towards banking union, while stressing the importance of respecting the integrity of the single market. (MB and AN/EH/LC/EL/FG/transl.fl)